We haven’t got a ZAC, yet

AUSTRALIANS have long regarded New Zealand as something of a distant relative – except on the sporting field, where the two countries have become mortal enemies.

But despite the two countries’ physical proximity, shared colonial and military history and economic ties, New Zealand has remained an entirely separate entity, independent of Australia.

Two decades ago, however, Australia and New Zealand formed a CER arrangement – an arrangement of Closer Economic Relations.

Now there are suggestions that the agreement go further, and Australia and New Zealand come into a full economic union, including the establishment of a joint currency – the Zealand Australian Currency, or ZAC.

Among those who support an economic union is Hugh Templeton, a minister in the New Zealand government in the 1980s that helped get the CER up and running. In fact he believes an economic union between the two countries is a natural progression.

In an article commemorating the 20th anniversary of the inauguration of the CER, Mr Templeton said: “Australian and New Zealand would strengthen themselves in establishing an integrated regional grouping. It would assist in facing up to the challenges of globalisation in a world economy.

“In anticipation of longer term moves to global currencies, already being talked about, the trans-Tasman community should move this decade to full economic union with a common currency and joint Reserve Bank.”

The concept of economic regionalising is not a new one. The European Union is a classic example of member States coming to agreement on economic issues and strategies. In adopting the euro as its currency, the EU abolished many of the currencies of the member States, including the French franc and the German Deutschmark.

BankWest senior economist Alan Langford believes a currency union such as that in Europe is a possibility, although he says it is not inevitable.

“A currency union will probably happen in the next 10 to 15 years, however it is not inevitable. The issue needs to be explored much further before any steps are taken,” he said.

Such a union would not mean the centralising of the politics of the two countries, however. Instead, it is likely that a currency union would involve the establishment of a common currency and joint reserve bank.

Economics lecturer at Edith Cowan University, Kevin Vanderplank, said it was necessary for the distinction to be made.

“A currency union is basically where you have one currency that operates across a broad spectrum of economies,” he said.

“In South America, for instance, you have different countries, but they have all adopted the US currency.

“They have all got their own economies but they use the US dollar as the currency because at least it is more stable than their own currency.

“But if you have a look at the North American situation, you have the North American Free Trade Association, which is a link up between Mexico, the US and Canada. There is an economic union there, allowing free trade, cross-border transfers and such, but they still operate their own currency.”

Any currency union would not affect the respective levels of Goods and Services Tax, so there would be no possibility that New Zealand’s current GST of 12.5 per cent would be applied in Australia. Fiscal harmonisation – sharing of revenue generated by the countries – has at no stage been touted as a possibility, and it is not an automatic product of currency union.

“An economic union does not necessarily mean a political union. This means that issues like rates of GST, and revenue from it, would remain independent,” Mr Langford said.

“However there would be a natural tendency for those rates to converge.”

The real advantages of a united dollar would be felt through the enhancing of trading conditions between New Zealand and Australia.

“The benefits that arise from this basically are to free up trade and make trade easier between countries that are operating under the same currencies,” Mr Vanderplank said.

“Everything is priced in one currency, you don’t have to worry about exchange rate risk or conversion risk. It also makes for a bigger trading block. If you’ve got a couple of countries whose economies are behind that currency, it just makes it a bigger, more liquid currency in the international market, and gives it a higher profile.”

So what would a currency union mean to an everyday Australian’s way of life?

“From an Australian point of view, I don’t think it would have too much of an impact,” Mr Vanderplank said. “The Australian economy is so much bigger than the New Zealand economy, so what it would do is free up trade a little more effectively between New Zealand and Australia, which is already reasonably free.

“To my mind, the biggest impact would be in New Zealand more than Australia.”

Research undertaken by David Tripe, a senior lecturer at the Centre of Banking Studies at Massey University in New Zealand, suggests that one advantage to both countries could be an increase in competition between banks and mortgage providers.

“One of the consequences of the European Monetary Union process has been on competition between banks,” he said.

With no currency barriers, banks based in particular countries are able to extend into other countries. For example German banks can tap in to the French market and provide competition because the uncertainty of borrowing in a different currency has been removed.

Mr Tripe believes the same situation could exist for Australian banks in New Zealand.

Mr Langford said economic circumstances would play a role in who benefited from the currency union.

“One of the problems is that you would expect the New Zealand dollar to be dragged higher to align with the Australian dollar, meaning that if the ZAC is pushed up because prices for several of Australia’s major exports are rising, but the price of New Zealand exports are not, then the New Zealand exporters will see an erosion of their export earnings without the offsetting benefit of a rise in the global price of their goods,” he said.

“So to that extent the elimination of foreign exchange costs and exchange rate risk to the Australian market is of greater benefit than to the New Zealand economy.”

But any moves to establish a currency union will have to overcome numerous obstacles. In an article for the Centre for Independent Studies quarterly review ‘Policy’ in 2000, Arthur Grimes suggests that one of the strongest arguments to retain separate currencies is that of national sovereignty. He highlighted that ‘Money is like a flag,’ meaning that a country identified currency, and said the introduction of the ZAC would be an unacceptable emotional blow.

This issue will apply particularly to New Zealanders if, as some quarters are suggesting, the New Zealand currency is taken over by the Australian dollar. Mr Langford sees this issue as a major stumbling block.

“The main hurdles to overcome would be emotive,” he said. “A currency union would take trans-Tasman relations to a whole new level. If the Australian dollar swallowed up the New Zealand currency, as is being suggested, it could result in a loss of identity.

“Imagine, for instance, the uproar by the Canadians if their currency was overtaken by the United States.”

Mr Vanderplank agrees, and also has reservations about any union between Australia’s large economy and that of New Zealand.

“The experiment of trading blocks or regional blocks trying to get together on an economic currency basis has, in general, been stalled by the political process,” Mr Vanderplank said.

“When you’ve got a powerhouse in that sort of environment then of course they are going to push things their way.

“When they floated the euro we were on tour with the students in Frankfurt, particularly to see what was going on, because that was where the European Central Bank was going to be located.

“We went to the Central Bank and talked to these guys who said: ‘It is going to be wonderful, and we are going to be doing this and that’. Our next visit was two hours later at the German Central Bank, and it was: ‘We are going to be telling them to do this and to do that’.”

Mr Vanderplank also believes a common currency might enhance a logistics problem already experienced by Australia.

“By having a unified currency – and already Australia suffers from this by having a unified currency across the size of the country that we’ve got – when you set exchange rate policy, or you set interest rate policy, you are setting for the entire country, and conditions in one part of the country may not be appropriate for the settings they have got,” he said.

“All you are going to be doing is expanding that problem to another country. So you might find, for instance, in New Zealand, inflation starts to creep up, but it’s not a problem in Australia. Then we might find we are, all of a sudden, starting to import New Zealand’s inflation.”

Whether it was the ZAC or the Australian dollar that would take over the New Zealand dollar, the overall process would follow a similar path to that of the euro, Mr Vanderplank said.

“Experience has shown it takes between five and 10 years to put these things together, because if you are going to have a uniform currency then you have to have a number of economic factors that are relying upon another,” he said.

“Interest rates, inflation, that sort of thing, have to be settled out between them, and they need time to get that into place.

“Over a period of time we would want the two countries to achieve standard levels of inflation, standard levels of interest rates, so there is some sort of uniformity across the two countries.

“At a particular day they will decide the New Zealand dollar will now be equal to however many Australian dollars, and they will just fix it at that. Then they will just fade out the New Zealand currency.”

But for the purpose of political stability between the two nations, Mr Vanderplank said it was likely a new currency would be introduced.

“For the political issue, I think they would have to establish a new currency. For the ease of transition it would be better to use the Australian currency. But that means New Zealand would have to be subservient to the Australian dollar, and whether they would be happy with that would be another issue.”

The concept of a joint Australian and New Zealand currency is purely speculative at the moment, and no steps have been taken towards establishing such a currency union. Much research and public consultation will be needed to address political and emotional concerns, as much as anything else, to ensure that any potential benefits will outweigh these. However, it will be interesting to watch developments over the next few years to see if the authorities do push ahead with a currency union, or even look into taking it a step further with an economic merger.

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